Domestic credit and new business density in low-income countries: A threshold and nonlinearity study

This study examines whether domestic credit stimulates new business density in low-income countries and whether that effect is nonlinear. Using a panel of 20 low-income nations (2006–2022), linear fixed-effects and system GMM estimations reveal no significant average credit effect. However, Hansen threshold and panel smooth transition regressions uncover a sharp regime dependency: only after regulatory quality exceeds roughly – 0.48 (WGI scale) does domestic credit become a significant driver, with a one-percentage-point increase in the credit-to-GDP ratio raising new registrations by about 0.08 per 1,000 working-age adults. GDP growth and urbanization remain robust correlates. The results, demonstrating that credit expansion without parallel institutional strengthening yields negligible entrepreneurship dividends in the poorest economies.